Alexandria Actual Property Equities (NYSE:ARE) is an workplace REIT centered totally on life science tenants. The consensus right here on Searching for Alpha appears to be that as a result of the corporate just isn’t instantly threatened by the do business from home motion it is the very best positioned workplace REIT. That is why of the analysts are protecting the inventory, just one is at a HOLD ranking with everybody else at BUY or STRONG BUY. The purpose of this text is to take a look at the details objectively and argue that though the REIT is essentially sound and amongst the very best it is likely to be buying and selling at too excessive a premium for the present market circumstances.
Overview of ARE
Most readers are already pretty acquainted with the corporate so I will not go into an excessive amount of element. What’s price mentioning is that there are a few issues which put ARE right into a class of its personal, particularly when put next with different conventional workplace REITs similar to Boston Properties (BXP) or Piedmont Workplace Realty Belief (PDM).
1. Initially, it is their tenants. ARE leases solely to life science oriented corporations. A few of these are large pharma companies, some bio-tech startups, and a few educational and authorities establishments. The bulls argument that labs can’t be taken residence the identical means a laptop computer can is legitimate. That is why virtually all workplace REITs have been highlighting their life sciences publicity on earnings calls. The difficulty is that clearly not all of the house is lab house. ARE would not inform us, however I believe that a big portion of house that their prime tenants similar to Moderna (MRNA) or Novartis (NVS) lease is definitely conventional workplace work house. In that case, then this half would clearly be vulnerable to WFH and we might simply anticipate that when corporations renew their leases, they are going to achieve this for a smaller sq. footage. Whereas that is largely hypothesis at this level, it’s a fear that I’ve.
2. Subsequent, its ARE’s development prospects. The corporate has been in a position to put up nice returns and in response to administration’s steering that is anticipated to proceed going ahead. Their development is primarily pushed by their sizeable growth pipeline, which delivered 450,000 sft of latest house through the first quarter alone. Past the primary quarter, the corporate expects to ship 6.7 Million sft of house over the following three years, including over $600 Million to their NOI. I’ve to say that is spectacular and the factor is that this pipeline is already 73% pre-leased which reveals that there’s vital demand for the product. On this entrance, I’ve to offer it to ARE, as a result of their development appears very seen and extremely locked in until their total occupancy plummets as a result of causes talked about above. At the moment, occupancy stands at 93.6% and the factor a few rising pipeline is that it’s going to possible put extra strain on leasing particularly when you think about that the corporate already has virtually 9 Million sft (20% of complete) of lease expiries till 2025. What’s additionally price mentioning is that the common money preliminary stabilized yield on the properties delivered in Q1 stood at 6.6%.
3. Lastly ARE is in a league of its personal due to its stability sheet. With a BBB+ ranking, 96% of their fastened price, and no debt maturities earlier than April 2025, there is not a lot that might jeopardize the corporate’s plans. Add to this the truth that they’ve over $5 Billion obtainable in liquidity to fund their development. And actually their total debt stage is cheap at round 5.3x EBITDA which signifies that the corporate is on no account overleveraged.
In order you possibly can see, ARE is a fairly particular firm and there’s a lot to love. The one concern on a elementary stage is the proportion of house that’s not lab house, however conventional workplace house and the implications this might need on the general occupancy stage particularly mixed with excessive lease expirations and a sizeable pipeline of latest developments. In both case, my skepticism in direction of the inventory is not coming from fundamentals however relatively the valuation.
In Q1 the corporate posted annualized NOI of $1.8 Billion. With that, we will calculate that it trades at an implied cap price of 5.6%. To me that feels means too low. With 10-year treasuries at 3.5%, it implies a ramification of solely 210 bps, which has similarities to the sort of spreads that the market is making use of to prime residential actual property or among the most secure web lease house. Though ARE is essentially wholesome, I nonetheless suppose their enterprise mannequin is beneath extra strain than residential house which tells me that cap charges might need additional to extend. This might be confirmed by the shortage of transactions that administration has been in a position to present and their lack of commentary on the earnings name concerning the pricing of ongoing offers. Because of this I price ARE as a HOLD right here and do not plan on shopping for till the under a 6-6.5% cap price.